Material v. Non-Material Contract Breaches

In Tennessee, like every other state, there is a difference between a material breach of a contract and a non-material breach of a contract. If one of the parties to a contract breaches the parties' agreement, what difference does it make whether the breach was material rather than non-material? It could make the difference between who wins and who loses a subsequent lawsuit.

It is important for lawyers and business people to understand the law about material and non-material breaches because, in many contracts (maybe most), the parties will not perform their respective obligations perfectly. Generally speaking, the law does not relieve a party to a contract of its obligation to render its agreed performance under a contract just because the other party has not performed its end of the deal perfectly. In most cases, only when a party has committed a material breach of the contract will the law excuse the non-breaching party from doing what it agreed to do.

Let's assume that there is a contract between "Party One" and "Party Two." If Party One breaches the contract in some material way (commits a material breach), then Party Two can refuse to perform its part of the contract without liability to Party One. Party Two can even bring suit and recover for the damages caused to it by Party One's material breach. There is an important exception to the hypothetical situation just discussed: In many contract situations (maybe most), before Party Two can stop its performance, Party One must be given the chance to cure its material breach. If Party One cures its breach, even if the breach was material, then Party Two is obligated to do what it agreed to do.

In some situations, it may be clear that Party One's breach was material. If that is not the case, Party Two may be taking a risk if it refuses to perform its obligations. This risk may exist even if Party One has not cured its breach. If a court later determines that Party One's breach was non-material, it is Party Two which will probably be held liable to Party One for stopping its performance.

The hypothetical situations discussed above involved contracts where one or both parties had not completed doing what they had agreed to do, i.e., they had not rendered full performance. Whether a breach was material or non-material can also make a pivotal difference in cases where both parties have completely performed their respective obligations. Assume that Party One materially breaches the contract first, and fails to cure its breach. Assume further that Party Two continues to render its performance under the contract, and materially breaches the contract. So, both parties have completed performing their respective contractual obligations, but not in the way that they agreed (they have materially breached). If Party One brings a lawsuit against Party Two for its breach, it will not be able to recover its contract damages because it materially breached the contract first. In Tennessee, generally, a party who materially breaches a contract first (and fails to cure its breach) cannot recover damages from a party that subsequently materially breaches the same contract. [i]

What kinds of contract breaches are considered material? What kinds are considered non-material? There are no precise answers to those questions. Whether a breach is material or non-material must be decided on a case-by-case basis. There are several factors a Tennessee court will consider when it determines whether a breach was material or non-material. The most important of those factors (in this author's opinion) are: (1) The degree of the loss of the non-breaching party between what it received and expected to receive; (2) whether the breaching party could have cured its breach had it been given notice of the breach and an opportunity to cure it; and (3) the good faith (or lack thereof) of the breaching party. There is a lot of room for interpretation when the above factors are applied. You could say that, when a court undertakes to determine whether a breach was material or non-material, Tennessee law pretty much results in the court applying a "smell test."

Here is a summary of some Tennessee cases where the courts have made the determination of whether a breach was material, or, on the other hand, non-material.

BREACHES THAT HAVE BEEN HELD TO BE MATERIAL

1.

Being at least ninety days behind in payments to a subcontractor under a contract calling for monthly progress payments. [ii]

2.

Being "seriously delinquent" in making progress payments under a construction contract. [iii]

Failure of a party to close a real estate transaction on time where the parties' contract had a "time is of the essence" clause. [v]

5.

Under a construction contract for the renovation of a home, a contractor's failure to protect the home from rainfall (three separate times), cost overruns, and the inferior workmanship by the contractor. [vi]

6.

Failure of an insured to submit to an examination under oath as required by the insurance policy. [vii]

7.

In an employment contract for a general manager of auto repair shops, the general manager's rudeness, discourteousness, and failure to respond to customers. [viii]

BREACHES THAT HAVE BEEN HELD TO BE NON-MATERIAL

1.

Installation of a rubberized roof instead of a rubber roof (where the owner failed to prove that such roofs were not functionally equivalent). [ix]

2.

Breaches, by the buyer, of the non-disclosure and confidentiality provisions of an agreement for the purchase of a television station where the seller received, from the buyer, the full amount of the agreed price. [x]

3.

Failure to complete the construction of a house by the agreed date where the parties had not agreed that time was of the essence, and the owner had allowed the builder to continue working after the agreed completion date. [xi]

4.

Failure of an owner to pay a builder on a cost-plus building contract, where the builder did not provide documentation of the costs incurred as required by the parties' contract. [xii]

5.

A franchisor's failure to maintain and to administer a marketing fund as required by a franchise agreement where the franchisor never collected any money from the franchisee, as permitted by the franchise agreement, for such fund. [xiii]

If you find yourself (or your client) in a contract situation where you want to stop doing what you agreed to do because the other party has breached the contract, there are some steps you should carefully consider taking to ensure that you have protected yourself as much as possible.

Step 1:

Many contracts expressly provide that the breaching party will be given notice of its breach and an opportunity to cure its breach. If you are a party to a contract that has such a provision, you should comply with it. Even if the contract to which you are a party does not have a provision that requires notice and an opportunity to cure, consider giving the breaching party notice of its breach and an opportunity to cure its breach. If you fail to do this, even if the contract did not expressly provide that you do so, a court may determine that you materially breached the contract first by not giving the breaching party notice and an opportunity to cure its breach. The general rule in Tennessee is that a party to a contract must give the breaching party a chance to cure its performance even if the parties' contract does not expressly provide that the breaching party have an opportunity to cure its breach. [xiv]

Under some circumstances, a court will not require a party to allow the other party a chance to cure its breach. Under what circumstances is a party excused from providing the breaching party with an opportunity to cure the breach? Here are those circumstances:

a. Where it is clear that the other party will not or cannot cure its breach even if given the opportunity;

b. Where the breaching party has committed fraud; or

c. Where there were substantial and extensive defects with the work or services provided by the breaching party.

Step 2:

Before you decide that you aren't required to do what you agreed to do because the other party breached the contract, make sure that you have not waived or modified the contract either expressly, or by your conduct. Depending on the circumstances of your situation, a court could conclude that you waived or modified the contract provision which you allege was materially breached. For example, in one Tennessee case, an owner refused to pay the builder for a condominium because the condo had not been completed by the time agreed to in the party's written contract. The court held against the owner because the owner had knowingly continued to allow the builder to build after the agreed completion date. Therefore, the court found that the owner had waived his right to insist on strict adherence to the contract schedule. [xv]

Step 3:

Consider seeking a written assurance from the other party that it will remedy its breach. If the other party fails to provide assurance that it will remedy its breach, a court will probably be more inclined to find that the breach was material. [xvi]

Step 4:

Document and photograph everything that will support your position that the other party's breach was material.

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If you want a term of your contract to be performed precisely, then make sure that, in your written agreement, you have the other party acknowledge and agree to perform that obligation precisely. If you insist, on the front end, on "strict performance" (the legal term for precise performance), you dramatically increase the chances that a court will find a breach of that obligation to be material. For example, in real estate and construction contracts, where the parties have not agreed that "time is of the essence," the failure of a party to close by the agreed date or to complete construction by the agreed date is not necessarily a material breach. Where, however, the parties have agreed that "time is of the essence," a failure of a party to close or to complete construction by the agreed date will probably be considered a material breach by a court. [xvii]

Ross Pepper is indeed a "lawyer's lawyer." He quickly gets to the heart of the matter and does not waste time on trifles. His knowledge of the attorneys on the opposing side and the judge hearing our matter gave me comfort. Ron Erickson Chairman and CEO eCharge Corporation

★★★★★

Mr. Pepper did such a thorough job that I never had to go to trial. He obtained an excellent settlement for me and one that was far more than what was originally offered. Kenneth Casey President KHCV TV Seattle, Washington